The insurance system and method defines at least one class having novel insurance concepts, products, methods, processes, techniques, applications, mechanisms including pricing, and the technologies that either singular or plural in usage modify or neutralize risks. These new products may be renamed with other brands depending on marketing, licensing and other business factors. The class is separate and distinct from the initial insurance system and method that identified, defined, and presented new securities that were standalone and yet could be used as the basis for futures, options, forwards and other derivative products. The original insurance system and method securitization and model for derivative products spanned the spectrum of illiquid to liquid properties.
Among the key distinctions between the insurance class of the present invention and the initial system securities class are the methods, pricing, taxation, suitability requirements, account opening and maintenance, risk transformation and risk transference and especially the ability to protect the market value of the designated item with an insurance product that is available for purchase by a premium payment. The system creates products within complex spaces that are comparatively user friendly and understandable particularly from the property owner's perspective. Payment of premium buys coverage.
Traditional insurance products provide the owner or beneficiary with a payment upon the occurrence of an insurable event. The common cost of the policy coverage is the premium. The policy has various declarations, insurable limits, term or maturity, deductibles and other language specific to the insured party and its contract or policy. When the claim is approved then the proceeds may be paid as a lump sum, in annuity form, or other contractual design. Until now, insurance generally addressed physical structure, land via environmental or contaminant claims, property, casualty, health, and life. Other policies addressed Errors and Omissions, or some definable potential liability. Insurance has not been available for financial and economic impacts such as swings in real estate values, particularly on a broad scale. This insurance space covers that as well.
Virtual real estate consists of space that may have trademarks, selling marks, copyrights, various content, domain names, special URLs, patents, trade-secreted processes and algorithms, traffic patterns and positioning. While each of these elements may have value, the potential value of the space may exceed that of a simple summing of the parts. Using a physical analogical example, a single-corner square-lot retail store literally has twice the exposure compared to a similarly dimensioned inside lot.
Another aspect of this positioning is the ranking or listing order of search engine results. It is generally accepted that the higher the ranking, the more valuable the property. Another is the synergistic space that is created and defined by not only separately by the above but also by a multiplicative manner.
The underwriting process for traditional insurance is different than the underwriting process for a security. The underwriting process for insurance is akin to assessing the insurability of the person or property and then offering a policy to the private policyholder. In fact, depending on the circumstances insurance coverage may be required or mandated. There is no similar requirement or mandate for investing. Underwriting for securities involves securitizing some property or entity and then selling shares, bonds, or other financial instruments to the public or sophisticated and/or accredited investors. The selling process in securities and derivatives is governed more by suitability, not insurability.
In the United States, taxation is different depending on products and jurisdictions. Most insurance claim payments are not taxable. This is not the case for securities and derivatives. Profits may be taxable as either long-term or short-term capital gains. Sometimes mark-to-market procedures or the given instrument itself can generate phantom income and a tax liability. It is a complex area. It is so for hedging or risk management operations too.
Nevertheless, in a typical derivative products or security short sale as a hedge, there may be identical, partial, or diverging movements. These depend on the basis, spread or swaps movement. The first two conditions provide relative degrees of offset; the latter condition does not provide this.
The 403(B) retirement plan may provide some downside protection to the participant. Here, the portfolio of investments (one or multiple) may have put-like protection on the cash contribution. This annuitized form of plan does not generally show the cost of this put option feature. It is implicit. The system and method of the present invention goes beyond that to explicit premiums, defined coverage. Subsequently, one can calculate the cost of a policy in the present system and method according to the invention to that of plain homeowner's coverage, and again the cost of a policy according to the present invention to a bundled policy. While the cost then seems implicit, one can still calculate the differentials. Depending on the plan, upon the death of the participant the proceeds would be the greater of the actual market value or the cash contribution. This is another difference between the invention and other products.
Hedging or risk management focuses on providing protection by controlling positions that offset one another according to various degrees. Therefore the ongoing risk management and investment process can acquire and/or require new instruments.
If a property is damaged by wind, water, hail, earthquake, fire, or other insurable event then there is a payment to the insured for the amount determined by the claim adjuster or some other party. That claim payment is not income. There are some existing derivative products in real estate that may generate taxable consequences. However, nearby properties that have little or no physical damage are still influenced by the economic damage. To make this point even clearer, consider a condominium, apartment building, or multiple family dwelling. If even one unit is damaged the whole suffers. This negative effect is magnified by more damaged units. Dramatically, if you owned the only unit that was unscathed, you would be damaged but unable to file a claim until now.
Again, an analogy is useful. If there is a fire in a neighborhood then the house that burned may have some recourse or recompense due to policy claim payment. Without a rebuilding or restoration, the damaged property continues to impair neighborhood or local values. With or without rebuilding, the physically damaged property owner was made financially whole. This was not necessarily the case for the neighbors.
Similarly, for a commercial property there may have been water or flood damage for all the floors below a property holder's floor. Nevertheless, the strata of flood or water damaged floors has a negative impact on the physically undamaged floor or floors.
Another variation but not the final variation or limiting variation is land contamination. This contamination can be polluted water, wells, aquifers, or chemical, biological or radiological contaminants, the dumping of refuse and so forth. If a property is in the area, vicinity or otherwise proximate to the fouled environment, then that seemingly unharmed property has actually been damaged.